Gold prices are poised for a "spectacular" and prolonged rally as the recession deepens and investors finally become disillusioned with the U.S. dollar.
So says renowned Wall Street financial forecaster and economist Peter Schiff, who loudly warned of the October 2008 stock market crash and accompanying recession as far back as 2006.
Since the global economic meltdown, the president of the Connecticut-based investment firm Euro Pacific Capital has struck a chord with rattled investors who have lost faith in America's bedrock financial institutions. Hence, his well-received television media blitz in recent months has focused on extolling the virtues of owning gold bullion or gold equities, as well as urging Americans to get out of U.S. denominated investment assets.
In a recent on-camera interview with BNW Business News Wire, Schiff suggests that the looming prospect of a hyper-inflationary environment in the U.S. will severely debase the greenback over the next few years. And the global investment community will realize that gold represents the ultimate "store of value" as a safe haven replacement for a discredited U.S. dollar.
Hence, gold bullion and gold-related investments, such as gold equities, will prove to be the best way to shield one's money from the ravages of a protracted and severe inflationary environment, Schiff says.
"If you really want to grow your wealth, you should own gold in the mining sector," he adds, while also suggesting that gold equities (companies that are already in production) offer the greatest leverage to rising gold prices.
"With gold stocks, there's obviously a lot of leverage to higher gold prices. As millions or billions of people discover gold as a store of value and as a way to escape inflation, there's going to be tremendous demand and somebody's going to have to supply that demand. It's obviously going to have to be mined," he says. "So the companies that have gold and mine it are going to see profit margins explode."
This extraordinary scenario will be accentuated by two key developments, Schiff says. One of them concerns the fact that burgeoning demand for gold will continue to outstrip annual global output. In fact, world gold production has been steadily declining since it peaked in 2001 in spite of a nearly U.S. $600 rise in gold's price since then.
"Mines are not as productive as they used to be. Supply is very constrained. So if we get a big increase in demand, there are really no significant new gold deposits that are going to come on-stream any time soon. So the companies that are already producing are simply going to be able to get a lot more money for the ounces that they pull out of the ground," he adds.
The other key consideration is an inevitable return to the ‘Gold Standard' as a way for the world's central banks to attach a meaningful valuation to each of their country's currencies, Schiff says.
"The only solution to the economic problems that we have today is a return to sound money… The world is ultimately going to have to move away from the ‘Dollar Standard' and back their currencies with something real. I think gold is the best thing to use. Gold has been money for 5,000 years," he adds.
When we go back to a real monetary standard…you're talking about billions of people who don't own any gold right now who will. Where's the gold going to come from? It's going to get mined."
So obviously, in order for the world to go back to a Gold Standard, given how much paper money the U.S. government has printed, gold prices are going to have to be up in the stratosphere to make it work," he declares.
"I think that gold is going to go to many thousands of dollars an ounce. I'm not exactly sure how high but I think it will be a spectacular run."
Hence, gold producers will be big beneficiaries of the paradox that the noble metal is gradually reverting back to its traditional role as a last-resort hedge against economic turmoil and political crises at a time when underground supplies are beginning to dry up.
This suggests that gold stocks will be counter-cyclical investment stand-outs for the next few years, Schiff says. Against a grim backdrop of painful and pronounced economic contraction in North America, gold miners will literally have a license to print money.
"This is one sector that we can be very optimistic about because gold companies are going to be in the business of producing money. That's going to be the money that people want. Not what the central banks are printing, but what gold mines are producing. That's going to function as money," he adds.
Yet, even though most gold producers are already experiencing impressive year-on-year earnings growth that promises to dramatically accelerate over the next few years, their lustrous prospects have yet to win over the mainstream investment community, Schiff says.
"I think a lot of the gold stock prices don't reflect how high gold prices are going to go and what that's going to mean to the profitability of these companies. I don't think that this is appreciated by the market," he adds.
Indeed, small- to mid-sized gold mining stocks are still being overlooked by most investors for their trend-bucking tremendous growth potential, Schiff says. Additionally, most of these gilded equities have been over-sold since the onset of the recession and can still be acquired at bargain basement prices.
"Most stocks are significantly below what they were (in 2007), even though the price of gold is higher and the cost of mining is lower," he says.
"And I think that the price of gold is going to keep rising faster than the price of producing it. And so gold companies are going to remain very profitable."
Meanwhile, the next major up-leg in what Schiff refers to as the early stages of a secular bull market for gold is not far off, he says. It has merely been delayed by an unexpected and unsustainable rally in the U.S. dollar in recent months. One that has been caused by global deleveraging and by the false sense of security that investors gain from moving their money into U.S. treasury bills in a time of crisis, says Schiff.
"One of the reasons that gold isn't stronger is because of this temporary strength of the dollar. This is keeping the gold market in check. And the dollar is getting some of the safe haven money that should be going into gold," he says.
"At some point that will stop. The people who are buying dollars will realize that there's no safety in dollars. Because the central banks are going to try to pay for the economic bailouts and stimuli by looting the world's savings and by printing money and debasing it."
"So, if you want to escape that, you hold gold, which is something that the government cannot debase," he concludes.